Top Economists on How to Fix the Economy

On Wednesday, October 12th 2011, the New America Foundation released a bold new plan to pull the global economy back from the brink. Economists give The Daily Beast their views. Plus, read the details of the proposal.

I think the authors are absolutely on the right track. and they’re smart to get outside the usual constraints—they essentially ignore issues like “shovel ready” or how our economy could actually absorb $240 billion a year in new infrastructure projects without trying to drink from a firehose. They say we will help underwater-mortgage holders who can ultimately service their loans but not the ones who can’t, when, of course, it’s not obvious which is which.

But these are real issues. Over more than two years, we spent less than half of their annual $240 billion on infrastructure in the Recovery Act, and it was a real challenge to do so in a way that emphasized efficiency and accountability.

But why not start with a really big plan like this? In fact, a five-year plan (hmmm … given historical contexts, might make sense to make that four or six years) gives us a lot more time to build what you might think of as the infrastructure of public infrastructure.

The bigger question I have after reading this, however, is what should one make of a plan that is so out of context? As I write this, the president’s jobs plan—practically a rounding error to the NAF authors—failed to get full Democratic support in the Senate! I can only conclude that the authors are thinking “game changer.” Good. We desperately need to change the game. The problem is the players, the referees, and the fans are all playing the old game.

The authors provide an excellent analysis of the causes of the crisis, and a thoroughly reasonable set of proposals about how to address it. They focus justifiably on the central fact that this is a debt crisis, of the classic variety that results from a capital flow cycle – think Argentina, Turkey, Russia, Thailand. A debt crisis is very different from a typical cyclical crisis in two important ways. Economically, it leaves the country with a debt overhang that can exercise a poweful drag on recovery, as both creditors and debtors struggle their ways to dig out from under a mountain of bad debts. This is the principal source of the continuing stagnation in both the United States and Europe.

A second reason why this crisis is so dangerous has to do with the political economy of the aftermath of a debt crisis. Every debt crisis leads to bitter battles over how the burden of adjustment will be distributed. The debts accumulated over the past decade—whether in the United States or in Europe—cannot be serviced as contracted. They will be restructured. The question is, who will pay the price for this inevitable debt workout? Will it be homeowners, taxpayers, public-sector workers, bankers, or recipients of government services? In Europe the principal divide that has opened is among countries, with debtor nations pitted against creditor nations. In the United States, the principal divide seems to be economic, between those who have suffered most from the crisis and would like to see more government action to alleviate this suffering, on the one hand, and those for whom the crisis has not been so severe and who are loathe to see their tax bill rise to deal with problems that they do not have. So far both the American and the European political systems have been very nearly paralyzed by this ongoing conflict.

And this is the main problem with the fine analysis and admirable proposals contained in the Alpert-Hockett-Roubini paper: they are politically infeasible. I wish the reality were otherwise, and that policymakers were free to implement such sensible programs. But the polarized political economies of both the United States and Europe put powerful political constraints on the governments of the two regions. Unless and until this political polarization is overcome, and a consensus is built on the need to move forward toward a productive resolution of the crisis, we are doomed to lose yet another decade.

Richard Wolff, professor emeritus of economics, University of Massachusetts, Amherst

The paper's diagnosis is superior to most in daring to see the crisis as at least partly systemic: the confluence of basic global trends in production (excess capacity) and income distribution (worsening inequalities of wealth and income). It recognizes the basic contradiction between these two trends as yielding deep and lasting economic crisis. Too many workers have too little income to purchase the output needed to make huge productive capacities profitable. Those workers' debts now impede the further borrowing that postponed the crisis to 2007. The authors' solution is more massive intervention exceeding even FDR's in the 1930s and far more than Obama or the Republicans contemplate. The authors aim to save capitalism—the contradictory system the paper's authors describe but cannot name—from itself.

But fixing, adjusting, and saving capitalism are not the only options. Moving beyond capitalism to explore alternative systems (of coordinated production, different distributions of income and productive wealth, different decision-making arrangements in production, etc.) is another. Consider that the current huge global crisis is capitalism's second in 75 years and that another 11 business cycles plagued the U.S. economy between the two huge crises. The Cold War and its legacies have kept the debate over capitalism per se taboo for the last half century. That taboo never served us well and now positively cripples the national search for and debate over ways out of this crisis-ridden economic system. Among those who Occupy Wall Street, the debate over capitalism is underway. Maybe that will finally open the conversation among economists that has so far done so little to overcome a deepening crisis.

Two cheers for the authors of "The Way Forward" for reviving the spirit and activism of Keynes. They are on the mark with a clearheaded analysis of the economic situation—in particular, the understanding that we are not in a typical business-cycle downturn. They also outline a serious plan of action to move the economy out its doldrums and forward again. One would well imagine this paper serving as the intellectual rallying cry for the Occupy movement. In fact, it should be.

The problem is not with economics, but politics. A major U.S. party, the Republicans, denies Keynes and scapegoats government, and in Europe, too many conservative governments such as those in Great Britain and Germany embrace austerity. Where is a leader of the caliber of Roosevelt or a Churchill (who knew and appreciated Keynes)? No one seems on the world stage.

Given the dismal political scene, I see little hope that this plan will be listened to immediately, but it does lay out a path for after 2012 when a reelected and energized Obama might make it his way forward—especially if the energy and activism unleashed by Occupy is translated in to a grassroots political campaign for economic reform.

"The Way Forward" offers a cogent analysis of the long-term economic implications of the 2008 financial crisis and the resulting Great Recession. As the authors argue, the solution resides in a long-term strategy of investment and global actions. But their analysis fails to acknowledge that the financial crisis was preceded by worldwide fuel and food crises over 2007-2008. Underlying the latter crises have been persistent and growing global problems of energy insecurity, food scarcity, ecological degradation, climate change and poverty. As I outlined in A Global Green New Deal: Rethinking the Economic Recovery, what is required is a long-term investment and coordinated global policy strategy to tackle simultaneously these deep-rooted economic, energy and environmental structural problems.

Moreover, such a strategy could easily be funded and supported through environmental pricing policies, whether through cap and trade or taxes, that would ensure that carbon and other pollutants, as well as water and scarce ecological and energy resources, are no longer “underpriced” by economies. Such a strategy is the only way of addressing two major distortions in the world economy that "The Way Forward" ignores. First, investment, innovation and job employment are currently discouraged, while pollution, environmental degradation, and financial speculation are encouraged. Second, these perverse incentives perpetuate the "no win" political stalemate over whether additional taxes on income, wealth and labor should be used either to reduce chronic budget deficits or boost public spending and aggregate demand in economies.

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